Investing Guide - 10 Simple Steps to Create Your Intelligent Portfolio

The simple guide of common sense investing. A broadly diversified, low-cost portfolio without the risks of individual stocks. Set up once and rebalance yearly. I wrote this open guide to show you how to make index investing work for you and help you achieve your financial goals.

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20 Year Portfolio Results (10,000 USD) - Broadly diversified 50/50 stock/bond allocation

The Rule of 72. Divide 72 by your annual rate of return, and you will get a rough estimate of how many years it will take for your initial investment to duplicate itself. Let's say your annual rate is 5 percent. Your money will duplicate itself in 14 years. The magic of compounding returns over an investment lifetime!

1. Invest in Broad Markets So That Your Savings Do Not Fizzle Out

Spread your money to many continents, countries and industries. You don't have to dig through individual exchanges, stocks and annual reports. Index funds were born to make your life easier. They track markets for you and do the background work, mostly automated based on a predefined index and at very low costs!

Big fortunes have been made by people who packed all their money into one investment they knew supremely well. To stay rich, however, it is important to diversify your wealth broadly.

Only a few of the Forbes 400 actually did this. So how many of the Forbes 400 fortunes from 1982 remained on the list 20 years later? A measly 16%—were still on the list in 2002. To make it onto the 2002 Forbes 400, the average 1982 member needed to earn only a 4.5% average annual return on his wealth.

Source: Benjamin Graham; Jason Zweig. The Intelligent Investor: The Definitive Book on Value Investing. HarperCollins.

2. Your Long-Term Setup

94% of the differences in portfolio returns is explained by asset allocation.

Choosing your depot mix and the discipline to stick with it over a long period of time becomes your key to success. It is not your age that should determine the mix, but rather how quickly you want to get your capital and whether you have ever gone through a financial crisis.

Source: Bogle, John C.. The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns (Little Books. Big Profits) (p. 224). Wiley.

50/50 stock/bond allocation? When the next turbulences on the stock markets come, your portfolio will not collapse so much and you can sleep more calmly.

The lowest point in the last 20 years was -32% and only after 3 years did it recover again. You should bear and sit out that much, otherwise you should increase your bond holdings.

Reasonable reserve: Your money reserve should last at least 6 months before you have to touch your stocks.

3. Don't Let Your Money Go Down The Drain

Great if you already save a lot, even better if you invest this money in the best possible way. The annual inflation means that you can get less for your money. Remember the rule of '72? Unfortunately this also works the other way round.

$50,000 will be worth of $32,562
Your purchasing power, based on a 20-year inflation rate Source: calculator.net

4. Keep Your Costs Minimal

Make sure you keep all variable costs as low as possible.

  1. Focus on index funds or funds with total annual costs below half a percent
  2. Trade via an affordable broker and as little as possible
  3. Drop consultants who are looking for annual fees

“The greatest Enemies of the Equity investor are Expenses and Emotions.” — John C. Bogle

Fees matter because they can cut into your overall return. If you pay one percent more per year in fees, you lose over $100,000 within 30 years.

Initial capital of $50,000, monthly savings rate of $300 and an annual return of 6%.

5. Never Try to Beat the Market

96 % of the best, do not manage to outperform the market average over a period of 15 years. Save yourself the time and get your average!

“Don’t look for the needle in the haystack. Just buy the haystack!” — John C. Bogle

Source: Bogle, John C.. The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns (Little Books. Big Profits) (p. 36). Wiley.

6. Index Funds on Autopilot

Index funds track a market index and give you a market average as your return. Fluctuations included, but at the lowest cost. ETFs are funds which you can trade on the stock exchanges (Exchange Traded Fund).

“To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks.” — Benjamin Graham

7.1. Choose Your Low-Risk Portion

Use saving accounts or money market funds for your emergency fund and short-term payments. They are usually free of charge, you receive more interest than in your checking account. Bond funds are recommended for a holding period of at least 7 years.

  1. Create savings accounts to build up your emergency reserves: Money Market Account Comparison, Comparison for GermanyComparison for Austria
  2. Buy bond ETFs for your long-term low-risk portion

Popular bond ETF options. Keep it simple as possible.

Bonds for US Investors

Total Expense Ratio Share Class
Vanguard Total Bond Market ETF 0.035 % Distributing
Fidelity U.S. Bond Index Fund 0.025 % Distributing

Bonds for European Investors

European Government Bonds
Total Expense Ratio Share Class
iS­ha­res Co­re Euro Go­vern­ment Bond Ucits ETF 0.09 % Distributing
Xtra­ckers Eu­ro­zo­ne Go­vern­ment Bond Ucits ETF 1C 0.15 % Accumulating
European Corporate Bonds
Total Expense Ratio Share Class
iShares Core Euro Corporate Bond UCITS ETF (Dist) 0.20 % Distributing

7.2. Time for Your Stocks

Diversify and invest your capital widely. On several continents, in many sectors and spread over many stocks. This is the key to long-term investing. Select low-cost investments to build your portfolio.

Index Funds for US Investors
Total-U.S. Equity Markets (Including Micro-Caps) Total Expense Ratio Share Class
Vanguard Total Stock Market ETF 0.03 % Distributing
Fidelity Total Market Index Fund 0.035 % Distributing
Developed and Emerging Non-U.S. Equity Markets Total Expense Ratio Share Class
Vanguard Total International Stock ETF 0.08 % Distributing
Fidelity International Index Fund 0.035 % Distributing

Index Funds for EU Investors
Stocks From Developed and Emerging Countries Worldwide Total Expense Ratio Share Class
SPDR MSCI ACWI (All Coun­try World) Ucits ETF 0.40 % Accumulating
Vanguard FTSE All-World UCITS ETF 0.22 % Distributing

8. Discount Broker

Buy your ETFs at a discount broker. Commision and trading fees should be as low as possible. You want the compound interest to work for you as effectively as possible!

Platforms for US Investors

There is a wide range of good brokers in the US, many of which are very affordable and with a wide range of index funds and ETFs to trade—often for free.

  1. Compare and find your broker
  2. Look out for the trading costs of your selected funds and ETFs
Platforms for EU Investors

There is a wide range of brokers across the continent and every country has its own tax regulations. In some countries, local brokers will handle the tax reporting for you. I would recommend choosing a broker which handles the taxes for you. That way you can save a lot of paperwork for yourself and also in tax advisory fees.

  1. Comparison for Germany, Comparison for Austria
  2. Look out for the trading costs of your selected funds and ETFs

9. Save Early and Invest Monthly

Establish a regular savings pattern, and begin the process of accumulating financial wealth as early as possible. The best way to save money is to arrange automatic deductions from your paycheck. Investing on auto-pilot! In addition, it can reduce your risk of temporarily inflated prices.

  1. Set up a savings pattern. Twenty percent of income is a good baseline number.
  2. Invest monthly by enabling automatic deductions from your paycheck

“Investments of equal dollar amounts in common stocks can reduce (but not avoid) the risks of equity investment by ensuring that the entire portfolio of stocks will not be purchased at temporarily inflated prices.” — Burton Malkiel

Source: Malkiel, Burton G.. A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing (Eleventh Edition) (p. 355). W. W. Norton & Company.

10. Rebalance Yearly

Markets will fluctuate differently, but to stay within your defined plan and risk, you should open and analyze your portfolio once a year. Let's say that the equity funds have grown more strongly, you should either adjust your savings plan or buy more bonds. This balanced approach will help you to stay the course.

The biggest risk in investing remains the market risk, which you can control yourself by selecting the appropriate indices and a reasonable asset allocation.

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